Dell focusing on small businesses as difficult economy takes its toll

Michael Dell settled into a seat at the corner of his boardroom table, a handful of small-business owners to his left and right.

Their meeting, held in the power center of the $61 billion company, was more than enough to underscore how much Dell Inc. has changed since it was a one-man show, PCs for sale out of a dorm room.

But in the gathering earlier this month, the similarities between everyone at the table were striking.

Here were heads of businesses from around the world, each leading very different companies but all trying to make sense out of a radically uncertain economy.

Companies large and small are trying to cope with volatile markets and tight credit.

And with small businesses a primary market in Dell's plan to recharge his company, he sees trouble coming from multiple angles.

"What you don't want to do is kind of sit back and do nothing," he told the gathered winners of Dell's small-business awards, given to firms that use technology in inventive ways. "That's the most dangerous thing to do at any time, but it's kind of the instinct when the economy slows."

He sent a similar message to his own employees in a recent e-mail, saying that when the economy recovers, customers will remember the companies that served them well in bad times.

That kind of dedication might prove especially vital among small and medium-size businesses. Dell Inc. has singled out those companies as one of five key sparks to reignite its revenue and profit growth.

"It's such a large segment and opportunity -- it's the vast majority of all the companies in the world and in the United States," said Erik Dithmer, vice president and general manager of Dell's North American small- and medium-business group.

"You're going to find pockets where it's horrible, and you're also going to find pockets where there's still a lot of success and still a lot of opportunity."

One doesn't have to look far to find a bad pocket.

Dell said it saw "conservative spending" from the U.S. small- and medium-business sector as a whole during its fiscal second quarter. Although the company said it saw stronger small- and medium-business sales in Europe, the spread of the current financial woes eventually could hamper the segment there, too.

As with U.S. firms, the fallout of the economic turmoil could hit smaller companies harder than large ones.

The environment is especially troubling for small businesses "because they don't have the kind of lifesavers large companies have," said Maria Minniti, an entrepreneurship professor at Southern Methodist University's Cox School of Business.

Small businesses certainly will not get the "too large to fail" rescue packages from the federal government. And even as their businesses face more widespread competition in the age of the Internet, Minniti said, they have fewer options for raising money and are seeing loan terms from local lenders get tougher.

For small businesses that work with large companies, the economic turmoil is trickling down in other ways.

For example, a big company struggling to maintain its cash flow might flex its muscle and delay payments to smaller suppliers, said Jim Nolen, a senior finance lecturer at the University of Texas.

"I have no leverage," Nolen said. "I can't force GE to pay me."

So cash flow gets tighter for small suppliers. With those receivables growing on its balance sheet, its bank gets more hesitant to lend, and less cash is available for payday and everyday operating costs.

The reasons for cutting back might vary from company to company, but it's clear that businesses large and small are scaling back their technology spending.

"People are really sharpening their pencils and thinking about how they'll spend on technology," said Ray Boggs, vice president of small-business research at IDC, a technology analysis company.

Dell hopes to strike a chord with small- and medium-business owners concerned about costs, Boggs said.

In the past 18 months, it has added product lines geared specifically for small businesses, including virtualization and storage technologies that cost less than large corporate systems yet still offer appropriate levels of flexibility and security.

"It's an opportunity for us to say, ‘All right, if customers are going to be focused on cost savings and efficiency, how do we emphasize the things ... that are going to drive cost savings?'" Dell said.

But as with the current market turmoil, the success of those moves still must play out.

Hewlett-Packard Co. also has taken steps to improve its storage portfolio for small and midsize companies, and its network of resellers that connect with many small businesses is more extensive than Dell's, particularly in emerging growth markets.

The volatility on Wall Street only ratchets up the pressure -- particularly in the U.S., where Dell generates most of its sales, and in the financial industry, one of its top business sectors.

On Sept. 16, Dell finance chief Brian Gladden warned that demand for its products and services, normally slower in August, hadn't rebounded as the current quarter progressed. The company's stock plummeted to 10-year lows.

Two research firms also reported that Dell's global computer shipments lagged the industry average, and several Wall Street analysts reduced their price targets for the company's shares.

But the picture shouldn't be painted in all blacks and grays, especially when talking about a segment as diverse and numerous as small and medium businesses, Dithmer said.

Because of its size and scope, the small-business market includes industries that continue to do comparatively well.

"We all know about the big stuff," Dithmer said.

"But in small and medium businesses, we have all sorts of niches. We have companies and customers in all walks of life."

Every little bit helps, of course. But if the small- and medium-business segment is going to help drive the company's growth when the economy recovers and technology spending picks up, Dell has to convince those firms that it's the best source for products and services now.

"If we're bold," said Dell, "it creates opportunities. And that's what we're spending a lot of time thinking about."